Middle District of Tennessee Finds
Bad Faith Statute Does Not Preclude
Punitive Damages Award Against Insurers
The United States District Court for the Middle District of Tennessee recently found that Tennessee’s “Bad Faith Refusal to Pay” statute, Tenn. Code Ann. § 56-7-105, does not preempt a common law punitive damages claim against an insurer.
U.S. Roller Works, Inc. v. State Auto Prop. & Cas. Ins. Co.
, No. 3:16-CV-2827, 2018 WL 1288942 (M.D. Tenn. Mar. 13, 2018). In
Roller Works,
the manufacturer of rubber to steel rollers sued its first-party property insurer seeking punitive damages for alleged bad faith failure to pay a portion of a wind and water damage claim. The insurer moved to dismiss the punitive damage claim, arguing that the Tennessee bad faith statute, which imposes a penalty of up to 25% for any refusal to pay a loss in bad faith, forecloses a separate claim for punitive damages.
The Middle District Court acknowledged that the Sixth Circuit held in 2012 that punitive damages are not available for breach of an insurance contract because the bad faith statute “provides the exclusive extracontractual remedy for an insurer's bad faith refusal to pay on a policy.”
Id.
at *5,
citing Heil Co. v. Evanston Ins. Co.
, 690 F.3d 722, 728 (6th Cir. 2012). The
Roller Works
decision explained, however, that while federal district courts ordinarily must follow the Sixth Circuit’s
Erie
guess as to the interpretation of state law, district courts may depart from Sixth Circuit precedent when state appellate decisions disagree with the Sixth Circuit. The court noted that since
Heil,
five decisions from the Eastern and Western Districts of Tennessee elected to follow the Tennessee Court of Appeals’ decision in
Riad v. Erie Ins. Exch.
, 436 S.W.3d 256 (Tenn. Ct. App. 2013), which found that in enacting the bad faith statute, the Tennessee General Assembly intended to create “an additional form of recovery for plaintiffs,” not to abrogate existing common law remedies. Because
Riad
disagreed with the Sixth Circuit’s
Heil
decision, the
Roller Works
court had “little difficulty joining in the Eastern and Western Districts in concluding that the bad faith statute does not preclude recovery of punitive damages.”
Based on the unanimous holdings by the federal district courts in Tennessee, the bad faith statute does not preclude recovery for punitive damages, unless the Tennessee Supreme Court rules to the contrary.
